The government has decided to commission a new, privately run prison. As Eric has previously discussed, there is a fairly canonical paper on the topic by some Harvard economists, which concludes that:

…a plausible theoretical case can be made against prison privatization. This case is weakened if competition for inmates can be made effective, but strengthened by the relevance of political activism by private contractors. One instance in which the case against prison privatization is stronger is maximum security prisons, where the prevention of violence by prisoners against guards and other prisoners is a crucial goal. In many cases, the principal strategy for preventing such violence is the threat of the use of force by the guards. We have shown that it is diffcult to delineate contractually the permissible circumstances for the use of such force. Moreover, hiring less educated guards and undertraining them–which private prisons have a strong incentive to do–can encourage the unwarranted use of force by the guards. As a result, our arguments suggest that maximum security prisons should not be privatized so long as limiting the use of force against prisoners is an important public objective.

Basically, the case for privatisation is that incentives to hit performance targets encourage innovation. The case against them is that there are plenty of things (like inappropriate violence) that you can’t measure, yet help to make the performance targets you can measure. So the important question isn’t ‘what are the performance measures’, but ‘what can’t you measure’? If you can’t measure important aspects of performance and you give strong incentives to meet targets then there are likely to be unintended, and potentially unsavoury, consequences. That’s not an argument against privatisation but simply a caution that high-powered performance targets should be used with great care. It is particularly salient when we are talking about a contract that affects the physical and mental welfare of so many people.

The performance contract has penalties based on recidivism rates; that sounds non-crazy. And, the biggest flack I’ve yet heard about the private company that’ll manage it, which is currently managing another one, is that they treat the prisoners too nicely – they cut back expenses on guards and put in TVs and decent food to make the inmates happy.

I guess you don’t need a stick if you have a monopoly over carrots! I wonder if that is consistent with Shleifer’s recommendation against private provision to violence-prone inmates. It surely could be, but I don’t know the details of who is housed in which NZ jails.

You’d probably also want some KPI that punishes the prison if inmates are killed, so that the prison doesn’t have incentive to put hits on folks with high likelihood of recidivism.

Shleifer is mostly worried about inefficient cost chiselling in industries with little scope for beneficial technological innovation and where there are margins for chiselling that can’t be contracted. I was 100% with Shleifer, and posted as much, saying that prisons are about the last thing I’d privatize in NZ. Then I saw the reports on the private prison chiselling on costs by treating prisoners like human beings to save on guard costs. And I updated my priors.

Richard29

“The case against them is that there are plenty of things (like inappropriate violence) that you can’t measure, yet help to make the performance targets you can measure”

The other thing worth noting is that by definition the involvement of private providers introduces and additional ‘performance requirement’ that doesn’t exist in the public sector – the requirement to make a profit.

It is important to consider this in relation to those unmeasurable behaviours. There are a massive number of ways an organisation can save costs (many of them with negative consequences either for inmates, staff or the public) and this particular performance objective has no cap and often runs counter to other objectives.

Thought experiment: I am a prison company and I have a KPI to reduce recidivism by 10%. Suppose I innovate and find that I can run an effective but reasonably expensive ‘peace n love’ workshop with inmates and the effect is a 20% reduction in recidivism. Arguably I would be acting irresponsibly towards my shareholders if I put all inmates through this expensive course because I could reduce spend, increase profits and still achieve my contracted 10% recidivism KPI by only running the course for half of the inmates. In fact reducing recidivism amongst more inmates than contractually necessary would be detrimental to the company long term because it would decrease my future supply of ‘customers’. Note these same incentives don’t necessarily apply to prisons run by central government. For them its worth the extra cost to run the course for everyone because the reduction in reoffending delivers savings in the police budget so the government’s ‘business’ is better off.

So long as they’re paid more for overachieving the recidivism target, all’s fine though, no? Though I suppose we eventually hit some laffer curve max where the reduction in revenue from repeat business overwhelms the incentive payments.

Richard29

Indeed – but therein lies the problem – there is a constant need to refine and re-refine the contract and KPI’s to stay one step ahead of people who would gain the system. Given that there are literally thousands of behaviour changes you can make to save costs that might impact quality or public safety it is an uphill battle and at some point you have to wonder whether the overhead of the endlessly growing private sector incentive system costs you any less than the overhead of supposed public sector innefficiency.

When I discussed the HSV paper back in 2009 I made the point that there is a case to be made for private prisons, but it may not be as strong as for other services currently provided by the government, and it is at its weakest for the case of maximum security prisons. The HSV paper is just an application of the incomplete contracts approach to the theory of the firm applied to contracting out. The interesting thing about prisons, and the reason that HSV discuss them, it that they are an example where it is not clear who should run them. Things like foreign affairs fall into the government provision camp where as cars fall into the private provision camp but for prisons its not clear. The government should be very careful as to how it writes the contract with the private provider.